Asian banks step in as European lenders pull out

Japanese banks stepped into the gap left by European lenders pulling their capital from Australia during the latest bout of market turmoil, new figures show.

European banks continued to withdraw from Australia during the turbulent June quarter, pulling another $US17.7 billion in loans, preliminary figures from the Bank for International Settlements show.

But while foreign lending to Australia decreased as a whole, there are signs Asian banks continued to fund the economy’s expansion, despite global jitters.

During the June quarter, when fears of imminent collapse in the eurozone reached new heights, Japanese lenders boosted their lending activity to Australia by $US13.7 billion. Loans from Taiwan fell by $US200 million, but are up over the last six months. The figures do not cover China.

The trend stands in stark contrast to the ongoing fall in funding from western Europe, with German banks cutting their exposure to Australia by more than $US8 billion and British lenders pulling $US2.1 billion.

All up, foreign lenders’ total exposure to Australia fell by $US12 billion during the quarter, in which global funding flows between BIS member nations’ banks contracted by almost $US600 billion.

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Despite the slowdown in lending to Australia, the government remains optimistic that foreigners will continue to finance the wave of mining investment, which is forecast to peak next year.

Treasury’s mid-year budget review, published yesterday, said the current account deficit would widen further in the coming years, from 5 per cent in 2012-13 to 5.75 per cent in the following financial year. In comparison, the long-run average for Australia’s current account deficit is about 4 per cent.

But while a widening current account deficit could leave the economy vulnerable to any freeze in overseas funding markets, Treasury played down this concern.

‘‘The key driver of the rising current account deficit is the inflow needed to finance the resources investment boom, with the household sector and the Australian government expected to be net lenders over the forecast period,’’ Treasury said.